STRATEGIC MANAGEMENT ACCOUNTING blogpost---200words

1

Topic 7: Managing Customer and Supplier Value & Relationships

ACCT5931 Strategic Management Accounting

1

2

Introduction to Strategic Management Accounting

Analysing the Internal Environment

Conclusion to Strategic Management Accounting

Analysing the External Environment

Developing Strategy

Measuring Performance and Organisational & Project Value

Topic 1

Topic 12

Topic 4

Topic 6

Topic 2

Performance Measurement & Management

Being a Responsible Corporate Citizen and

Managing Strategic Risks

Topic 9 Managing Sustainably

and Creating Shared Value

Topic 8Stakeholder & Resource Management

Topic 3

Topic 10

Strategy Analysis & Formulation

Managing Customer and Supplier Value

& Relationships

Topic 7

Developing and Using a Balanced Scorecard

Topic 5

Topic 7: Course content overview

2

2

n Required readings: – Reading 7.1 – Kaplan, R.S., Matsumura, E. M., Young, S.M., and Atkinson, A. 2011.

Management Accounting 6e: Information for Decision-Making and Strategy Execution, Pearson Education, pp. 218-237 [Course Readings Kit 2019].

– Reading 7.2 – Langfield-Smith, K., Thorne, H., and Hilton, R. 2015. Management Accounting 7e: Information for Creating and Managing Value, McGraw-Hill, pp. 653, 656-661 [Course Readings Kit 2019].

– Reading 7.3 – Kaplan, R.S., Matsumura, E. M., Young, S.M., and Atkinson, A. 2011. Management Accounting 6e: Information for Decision-Making and Strategy Execution, Pearson Education, pp. 78-81 [Course Readings Kit 2019].

– Reading 7.4 – Grant, R., Butler, B., Orr, S., and Murray, P.A. 2014. Contemporary Strategic Management: An Australasian Perspective (2nd Edition), Milton, QLD: John Wiley & Sons, Chapter 5: Analysing Resources and Capabilities, pp. 157-158; and Chapter 6: The Nature and Sources of Competitive Advantage, p. 204-206.

3

Topic 7: Required readings

3

4

Topic 7: Desired learning outcomes

4

n In Topic 7 we aim to be able to: – Appreciate the importance and components of customer value – Apply the concepts of customer relationship management (CRM) – Conduct customer profitability analysis (CPA), use CPA

information for making decisions on managing customer relationships, and understand its benefits and weaknesses

– Understand and apply the concept of Customer Lifetime Value (CLV), and understand its benefits and weaknesses

– Understand the guiding principles for considering outsourcing supply, as well as associated benefits and risks

– Evaluate outsourcing decisions with make-or-buy calculations and understand the 'Total Cost of Ownership' concept

4

3

5

Topic 7: Components of customer value

n Key components of customer value are: – Price – Total product/service cost to the customer

(including ongoing product usage and disposal costs) – Product features – Functional characteristics provided – Quality – Product quality relates to performance, aesthetics and

durability; Service quality includes sales staff availability and product/service knowledge, after sales service effectiveness and complaint management

– Availability – Extent of distribution and retail network – Image – Market’s perceptions of the organisation’s customer

value proposition; generates brand loyalty – Bundling – Convenience from selling a package of

products/services together

Source: Grant et al. (2014)

5

6

n CRM refers to collecting and analysing data to understand individual customers’ behavior patterns and needs, and to develop strong relationships with customers

n Targets the “right” customers: – Most profitable for organisation – Inherently loyal – Provide high level of net revenue – Well-suited by differentiating aspects

of the organisation’s service from that of its competitors (i.e., fits with value proposition)

Topic 7: Customer relationship management (CRM)

n Benefits: – Increases effectiveness of

marketing spend (targeted campaigns and focus groups)

– Mitigates over-spending on low value customers, under-spending on high value ones

– Easier to target customers and improve use of interactions

n Challenges: – Significant technology and

human capital investments – Long lead times to develop

infrastructure – Cross-functional co-operation

and co-ordination

Source: Grant et al. (2014); Langfield-Smith et al. (2014)

6

4

7

Topic 7: Customer profitability analysis (CPA)

CPA takes into account the profitability of the product mix purchased by customers and customer-driven costs

generated by servicing these customers/segments

n Based on the principles of Activity-Based Costing (ABC) n Benefits

– Enables reconfiguring an organisation’s customer portfolio (managing unprofitable customers, conceding permanent loss customers)

– Enables formulating value propositions for customer segments (incl. pricing and discounting decisions; as well as targeted CRM for customer segments)

– Enables effective resource allocation to support most profitable customers n Weaknesses

– Static, single period perspective of customer profitability – Historical performance only

7

8

Topic 7: Examples of high vs. low ‘cost to serve’ customers

Activity High-Cost to Serve Customers Low-Cost to Serve

Customers

Manufacturing Customised product features

Standardised product features

Order Entry Salesperson manually processes small orders

Customer electronically submits order

Distribution Overnight delivery Delayed delivery

Credit Collection

Delayed payment; manual payment

Timely payment, electronic deposit

Technical Support

Requires frequent and support; training for

customer staff demanded

Customer has in-house support infrastructure

8

5

9

Topic 7: Customer lifetime value (CLV)

CLV is the sum of accumulated cash flows – discounted using the weighted average cost of capital (WACC) – of a

customer over his or her lifetime with the company

n Focuses on multi-period, future-oriented economic value n Benefits

– Considers relative profitability changes according to the customer’s lifecycle stage with the organisation

– Considers impact of tenure on the value a customer represents (1/defection rate = tenure; e.g., 1/20% p.a. defection rate = 5 year tenure)

n Weaknesses – Requires forecasts of future behaviour, making it less rigorous than CPA – Difficult to estimate components of CLV calculations

9

10

Topic 7: Seminar exercise 1

10

Robyn’s Ice Cream: Types of customers

10

6

11

Topic 7: Seminar exercise 2

11

AquaDrench: Customer profitability analysis (CPA)

11

12

Topic 7: Seminar exercise 3

12

Longevity Ltd: Customer Lifetime Value (CLV)

12

7

Topic 7: Outsourcing and collaborative supply relationships

n Guiding principles when considering outsourcing: – Those activities which relate to core competencies (where

the organisation can achieve definable pre-eminence and provide unique value for customers) should be performed in-house

– Other activities (for which the firm has neither a critical strategic need nor special capabilities) should be evaluated for strategic outsourcing to better or world- class suppliers.

n Consequently, strategic supply chain management has become an issue of increasing prominence and importance in world class organisations

13

13

Topic 7: Potential benefits from outsourcing

14

STRATEGIC BENEFIT EXAMPLE Greater flexibility for the buyer, especially re rapidly developing technology and fashion goods

Nike

Decreased design cycle-times with multiple, specialist suppliers

Apple: Frogdesign

Enhanced personnel depth and technical knowledge, plus specialised facilities

Alibaba: Tech development (US)

Reduced risk for component and technology development

Dell: Network of ODM relationships (incl. Inventec)

Access to new product, process and quality improvement ideas

South 32: Cannington lead & silver mines (Coffey Geosciences)

14

8

Topic 7: Potential risks of outsourcing

Source: Quinn & Hilmer (1994)

n Loss of critical skills – Skills of outsourced activities can be lost after a period of time – May create problems, if supplier develops/extends their core competency in

outsourced area, and they become unwilling or unable to supply (includes loss of strategic flexibility)

n Loss of cross-functional skills – Less opportunity for cross-functional insights and innovations, due to less

interactions among skilled people in different functional activities n Loss of control over a supplier

– When the supplier’s priorities do not match the buyer’s, quality of the outsourced product/activity can decline. This results in two sub-types of risk:

1. Appropriation risk: Risk that the supplier learns the organisation’s expertise and competencies and integrates forward, selling directly to the buyer’s customers

2. Diffusion risk: Risk that your competitive edge may be eroded by spreading expertise throughout the industry, as the supplier learns your expertise and competencies and passes this knowledge to its other customers

15

15

Topic 7: Evaluating the decision to outsource financially

1. To evaluate whether outsourcing or performing an activity in-house results in greater cost benefits (‘Make-or-buy’ decision): n Identify relevant costs (and

ignore irrelevant costs) and n Apply differential cost

analysis (we are only interested in cost differences) to evaluate the likely financial benefits from outsourcing

16

2. To compare alternative suppliers (by evaluating supplier performance): n Use a supplier

performance index (SPI)

n Where: SPI = Total supplier activity costs / Total purchase price

16

9

Topic 7: Total cost of ownership (TCO)

n Asks organisations to consider overall value provided by its suppliers

n Encompasses the quoted purchase price, as well as: – costs of purchasing - including costs of ordering, freight and

incoming quality control – costs of holding - including costs of storage, obsolescence

and money – costs of poor quality - including costs of rejection, re-

receiving, scrap, rework, repackaging, downtime and warranties; and

– costs of delivery failure - including costs of dispatch, premium transportation, downtime and lost sales owing to late deliveries, and holding and administration costs related to early deliveries

Source: Langfield-Smith et al. (2014) 17

17

18

Topic 7: Seminar exercise 4

18

Air Refresh Ltd: Make-or-Buy Decision

18

10

ACCT5931 Wrap-up: Congratulations!

19

19

Congratulations on submitting your Team Case Project!

19